Many contractors know that they have a few legal lifelines for safety as they walk the narrow path along the ledge between survival and failure. Yet, the strength of these legal lifelines has rarely been tested for reliability in recent years until now. In the recent court of appeal case, C.W. Johnson & Sons, Inc. v. Randall M. Carpenter (“C.W. Johnson & Sons”), the court tests the strength of the substantial compliance lifeline as it pertains to duly licensed contractors and has again confirmed the contractor’s right to an evidentiary hearing based on its claim of substantial compliance with the licensure laws.
Life on the Ledge – The Substantial Compliance Lifeline for YOUR CSLB License
C.W. Johnson & Sons (“Johnson”) was originally contracted to install flooring in Randall Carpenter’s (“Carpenter”) residence. However, this relationship soured when Carpenter and Johnson began to dispute before engaging in litigation over their respective claims.
It is undisputed that Johnson was properly licensed for the flooring installation work. However, Johnson’s Responsible Managing Officer (“RMO”) had died soon after the original installation and just as Johnson began to performing warranty, repair, and corrective work on the project. As Johnson failed to replace its RMO within 90 days according to License Law, Johnson was technically unlicensed while performing the warranty work.
Based on this technicality, Carpenter sued Johnson for failing to be licensed during the work, claiming, among other allegations, the disgorgement of all monies paid to the unlicensed Johnson. In its defense, Johnson maintained that it was duly licensed for the original flooring installation work, for which it was seeking compensation, and that it is entitled to a hearing on whether it substantially complied with the contractor’s licensing law.
But because of Johnson’s technical failure to be licensed during part of the work, the trial court sustained Carpenter’s demurrer to Johnson’s affirmative claims, effectively denying Johnson any opportunity to seek compensation for its licensed workmanship and implicitly approving of Carpenter’s next step of pursing disgorgement against Johnson and the return of ALL monies that Carpenter had paid to Johnson.
Subdivision (e) of Section 7031 of the Business and Professions Code establishes three requirements for the contractor to satisfy the substantial compliance exception to the mandatory licensure requirement for California contractors. The contractor must (1) have been duly licensed as a contractor before the performance of the act or contract, (2) have acted reasonably and in good faith to maintain proper licensure, and (3) have acted promptly and in good faith to remedy its failure to comply with the licensure requirements upon discovery.
While the trial court sustained Carpenter’s demurrer on Johnson’s claims on grounds that Johnson was not licensed during part of the contract, the appellate court found that Johnson adequately pled all elements of substantial compliance and was entitled to an evidentiary hearing.
First, as mentioned above, Johnson had alleged the indisputable fact that it was duly licensed before and during part of the contract. Second, Charles Johnson (“Charles”), the son of the former RMO, was an officer of Johnson, actively participated in Johnson’s business, believed that he was the RMO for Johnson, and reasonably did not know or have reason to know that he was not the RMO at the time of his father’s death. Third, when Charles learned that he was not the RMO, he immediately applied for and was soon granted the designation of RMO by the CSLB.
As a result, Johnson now has an opportunity to present its defense for substantial compliance with the Licensure Laws, which is necessary for Johnson to make its case for compensation for the original floor installation work Johnson had performed while it was licensed. This case is a major victory for contractors as it once again declares that contractors have a right to a hearing on substantial compliance, a lifeline for their affirmative claims, but also reveals the narrow ledge on which contractors must cautiously tread. Below the ledge is a chasm of legal snares, some of which may be fatal to a contractor’s affirmative claims or subject the contractor to a disgorgement cross-claim. As a practice, Contractors must stay vigilant in their business operations to ensure compliance with the Licensure Laws or seek counsel for advice.